Re-evaluating sustainable sovereign debt: A theoretic and econometric evaluation of the suggested new EU fiscal rule

29 Pages Posted: 7 Mar 2024

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Francesco Simone Lucidi

University of Naples Federico II

Benjamin Owusu

Bielefeld University - Department of Business Administration and Economics

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Date Written: March 2024

Abstract

The Commission of the EU proposed a new fiscal rule in 2022 focusing on the primary surplus of governments in the euro area rather than on public deficits. This paper analyses the suggested new rule by setting up a simple optimal control problem. Governments determine the optimal reaction of the primary surplus to public debt such that the squared deviation from a certain target surplus is minimized. We study the structure of the model and highlight its implications for the economy's stability. In addition, we perform panel data analysis for euro area countries where we empirically estimate the fiscal space for each country. We apply panel smooth transition regressions to account for distinct regimes depending on the differences between the interest rate on public debt and the GDP growth rate of the economies.

Keywords: Public debt, primary surplus, fiscal rule, sustainability

JEL Classification: H61, H63, E62

Suggested Citation

Greiner, Alfred and Lucidi, Francesco Simone and Owusu, Benjamin and Semmler, Willi, Re-evaluating sustainable sovereign debt: A theoretic and econometric evaluation of the suggested new EU fiscal rule (March 2024). Bielefeld Working Papers in Economics and Management, Available at SSRN: https://ssrn.com/abstract=4749979 or http://dx.doi.org/10.2139/ssrn.4749979

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
Bielefeld, 33501
Germany
+49 521 106 4859 (Phone)
+49 521 106 67120 (Fax)

Francesco Simone Lucidi

University of Naples Federico II ( email )

Via Cintia, 21, Monte S. Angelo
Napoli, 80126
Italy

HOME PAGE: http://francescosimonelucidi.com

Benjamin Owusu

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universitätsstraße 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

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